10 things investors should know about buying a franchise
10/28/2007 5:56 PM
11/02/2007 7:02 PM
The International Franchise Association says that investing in a franchise is a major undertaking -- one that involves not only money but possible lifestyle changes. Want to avoid the sleepless nights? Here are key items you need to consider before you buy a franchised business.
1. CONDUCT A THOROUGH INVESTIGATION
Before signing a franchise agreement, know the scope and size of the industry you're interested in as well as various franchising options that are available. There's plenty to look into. Between 2003 and 2005, nearly 900 new concepts began franchising, according to an IFA Educational Foundation study.
Investments range from as low as $10,000 to more than $1 million, and business formats come in all shapes and sizes.
During the investigation phase, prospective investors should talk to franchise experts, consult family and friends, research companies, check finances, and read the latest research about franchising.
2. LEARN THE BASICS OF FRANCHISING
The IFA, founded nearly 50 years ago to promote franchising worldwide, provides a free, online course, "Franchising Basics," in addition to other resources to aid prospective investors. (www.franchise.org)
The Federal Trade Commission’s Consumer Guide to Buying a Franchise is also available on the website. To help prospective investors find the franchise that best suits their interests and capabilities, the IFA offers its Franchise Opportunities Guide which allows readers to review information about IFA-member companies by investment level, category and alphabetically by name.
3, 4, 5. MONEY, MONEY, MONEY
Buying a franchise typically requires ample capital. The fees and expenses vary from company to company based on a variety of factors such as the area where the franchise is located, equipment needed, number of employees required and other fixed costs, initial fees and royalties.
Determine what financial assistance programs may be available. From commercial bank loans to independent financial specialists to U.S. Small Business Administration programs to direct financing, which many franchise systems offer, there are many options available.
6. STUDY THE FRANCHISE DISCLOSURE DOCUMENT
Franchise companies are required to present prospective franchisees with a franchise disclosure document 14 calendar days before any signing or payment can occur. Among the information that document includes are: the experience of company officers, financing, litigation, the network of franchises and the terms of the franchise agreement. The objective of the document is to protect prospective franchisees from fraudulent offers, while ensuring they are well-informed of their obligations.
7. FIND ATTORNEYS AND ACCOUNTANTS KNOWLEDGEABLE IN FRANCHISING
Because the franchise disclosure document is often quite lengthy and sometimes difficult to fully understand, it is important for prospective franchisees to seek the assistance of attorneys and accountants experienced in franchising.
8. COMMUNICATE WITH CURRENT AND FORMER FRANCHISEES
Some of the best resources available when it comes to assessing different companies are current and former franchisees. The franchise disclosure document is required to contain the contact information for current owner-operators and some who are no longer associated with the company. Communicating with them can inform potential investors of the day-to-day operations and how the franchisees feel about their relationship with the franchisor.
9. GET TO KNOW COMPANY EXECUTIVES
Franchise systems want their franchisees to succeed. The IFA offers opportunities for prospective investors to meet with company representatives at a variety of trade shows. It is important for potential franchisees to get to know those who are a part of their main support system.
10. KNOW YOURSELF
A thorough self-examination is as necessary as investigating the franchise companies themselves. Franchising is not risk free. There are no uarantees of success and not every individual with entrepreneurial interests is suited for the format. There is not much room for personal creativity since franchisees are buying into someone else’s idea and business model. Those hesitant to commit to the structure and restrictions of franchising might want to pursue other types of business.
Source: International Franchise Association, www.franchise.org
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